What is the cost of all the cash and short-term investments of private non-financial corporations (PNFCs)? For UK firms, the Bank of England (BoE) gave us clues last week: not as high as it was, not as low as it has been.
The BoE’s Statistical release on Effective interest rates for March 2015, reports its survey of 23 monetary financial institutions (MFIs) shows new cash deposits from PNFCs returning an average 0.48% while the rate on their new lending to PNFCs was 2.43%. So, maybe the cost of carry is 1.95%.
That sounds a lot – but the average loan rate probably reflects that bigger investment grade firms that might be expected to borrow more cheaply from banks generally fund mostly from bond markets, so the average under-weights them. And that 1.95% is itself the lowest since February 2012. It can be compared to the average since the BoE started collecting the figures in 2004 of 1.79% and a series low of 1.08 in June 2008.
The UK’s Office for National Statistics shows UK PNFC’s cash etc. (including overseas deposits by UK firms) at the end 2014 topping £544 bn, up 8.3% over end 2013 (United Kingdom Economic Accounts, Quarter 4 2014). The BoE’s Statistical release on Money and Credit for March had PNFC deposits with UK MFIs at £320 bn. having grown by 9.4% since March 2014. So the estimated nominal cost of carry is £10.6 bn on firms UK and overseas balances (ONS) and £6.2 bn domestically (BoE).
More scary numbers can of course be generated by calculating the cost of holding cash based on firms’ weighted average cost capital, rather than lending costs.
The ACT’s survey in July and August last year, showed that companies were aware of the costs but saw strategic and prudential reasons for holding cash – and while 75% of companies planned to use cash, 43% still expected cash holdings to grow. I have seen no reason to believe that the reasons for corporate cash holdings set out in our survey report of September last year don’t still hold.
The cost of cash holding is, it seems, a cost of doing business today.
